Commentary

Emerging markets aren’t all the same

Commentary: It’s never been easier to invest with impact

By

ThomasKostigen

DENVER (MarketWatch) — Famed bond manager Jeffrey Gundlach, founder of Doubleline Capital, stood on the stage and espoused the importance of the emerging markets. He pointed to their growth and (relative) newfound stability.

Later, Ron Cordes, co-chairman of Genworth Financial, was on stage putting that into context for impact investors. “I have always taken whatever portion of my portfolio that I was going to devote to the emerging markets and then I take a percent of that for impact investments.”

The financial services conference here — the Innovative Alternative Strategies conference — brought out a lot of discussions about the emerging markets. Investment product structures, strategies, and hedging techniques were certainly a part of the show, but the real takeaway was not in what vehicle to put your money, but where on the planet to put your money. The emerging markets came out the clear winner.

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Here’s why: the developing world isn’t the same as it used to be. Technology, transparency, and corporate governance issues have created a new framework, a better framework, for investors. In short, your dollars can be tracked more easily thanks to Skype, email, and social media that facilitates information in a flash.

Want to know what’s going on in Burundi? It’s a click away.

Moreover, investment opportunities are more accessible. And this closing of the fissure that has haunted great social enterprises that can lift people, communities, and countries out of the bottom rungs of the economic ladder is changing the investment landscape.

Gerhard Pries, managing partner of Sarona Asset Management, said 20 years ago if you wanted to invest in private equity in the developing world, “you had to get on a plane.” Today, he says, that obviously isn’t the case. Technology has promulgated everything from money transfers to information flows. That means there are more investment opportunities from which to choose. And that means more competition among capital-seeking enterprises. Competition, in turn, breeds best practices and best-in-class showmanship for investors. This lifts the bar.

The International Finance Corp. estimates there are between $2 trillion and $2.5 trillion worth of opportunities for impact investments in the developing world. To make that clear, that is the total amount social enterprises are seeking to support their businesses. Given that these are small businesses, the sheer number of them makes the odds pretty good for some break-out hits.

Still, while this makes for a nice universe of investment possibilities, picking and choosing isn’t easy. Investing via a fund or financial institution is likely the most efficacious way for investor to get emerging market exposure. As well, it adds another balance sheet to mitigate risk.

Justin Conway, director of investment partnerships at the Calvert Foundation, says Calvert invests through other institutions this way. It has only written off about $2 million worth of bad investments out of a portfolio of more than $150 million, he says.

Cordes says it just makes more sense in many cases to invest through financial institutions rather than directly, especially with microfinance.

Microfinance investments are often in the hundreds or at most single-digit thousands of dollars. Shell out $100,000 — and an investor would be dealing with hundreds of positions.

In any event, the emerging markets are where population growth is occurring the fastest; it’s where most natural resources can be found; and it’s where economies are brewing. It’s no wonder that so many alternative investors are seeking to invest there. What I wonder is how the developed world can compete?

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